Local Government Finance is Development Finance #1

Dear friends and colleagues,

Welcome to the continuation of the COVID-19 Local Government Finance blog. Over the last few weeks we have received widespread feedback about our sequence of blogs and guidance notes on the local government finance response to COVID-19. The common denominator is confirmation of the title of this blog. Not everyone gets it – but most respondents have supported our assertion that local government finance is development finance. This includes using Operational Expenditure Block Grants as a means to accelerate the response to and economic recovery from the pandemic as highlighted in Edition 4 of the Local Government Finance COVID-19 guidance note, it includes applying Intergovernmental Fiscal Transfers to accelerate climate resilience as in the 15-country Local Climate Adaptive Living Facility, it includes financing sustainable cities with sub-national blended finance through the International Municipal Investment Fund, and it includes building state institutions in Somalia from the bottom up through the Joint Programme on Local Governance. The purpose of this blog is to tell the story of local government finance as development finance by highlighting policy reforms, investments and other happenings in the world of local government finance.

Are you:

  • a local government representative or official seeking to deliver benefits for citizens that you serve?
  • a politician, government official or international development professional interested in accelerating Agenda 2030 and the achievement of the Paris Agreement targets?
  • an interested individual who would like to understand better why local government finance is development finance?

If you answered yes to any of the above questions, then you may find this blog useful.

The Editorial of the Financial Times of Tuesday 30 June 2020 gets it, declaring that “Local governments deserve national help” and stating:

“The difficult balancing act between local autonomy and financial responsibility long predates Covid-19, and presents different challenges from one country to another. But in the special circumstances of locked-down economies, all countries face a similar risk; that subnational fiscal constraints can become the Achilles heel of the otherwise well-judged national economic rescue packages launched to offset the economic damage.”

National governments have realized that in supporting businesses and individuals, “moral hazard” and the risk of rewarding past irresponsible behavior should be far down their list of concerns. The same judgement should apply to their own local governments” (Financial Times editorial, Tuesday 30 June 2020.)

Powerful words. Indeed, why should businesses get bailed out whilst fiscal space is sucked out of local economies and societies, leaving citizens to pick up the bill in terms of higher taxes and lower levels of services? At the local level the private sector requires an engaged, liquid and confident local public sector to provide the enabling environment for it to flourish. This will be critical in the economic recovery from the pandemic during which many local governments will be simultaneously maintaining local services whilst leading economic development strategies to rebuild local fiscal space and local employment – sometimes by exploring new markets and areas of economic activity.

The Local Government Finance COVID-19 Guidance Note highlights the essential role local governments are playing in the response to the pandemic. The United Cities and Local Governments and UN Habitat live learning series has reminded us that the crisis has not only exposed who are truly the essential workers. It has also reminded us of what are the essential institutions – including often overlooked local governments.

Lessons from local economic development practice are that living standards rise when value chains retain value in the local economy and create clustering, specialization and positive externalities. This requires targeted investment and increases in productivity that usually accompany the urbanization process. Jean Pierre Mbassi, President of United Cities and Local Governments – Africa, explains in a recent podcast interview that the current rapid urbanization in Africa is characterized by low increases in productivity and that the continent is not yet reaping the full potential of its growing cities. This is critical because Africa’s urbanization is accelerating, for example the growth rate of Lagos is illustrated by figure 1. This pattern of rapid urban population increase is repeated in all countries, in intermediary cities as well as larger ones. Many places that were small towns within living memory now have populations of over 1 million inhabitants (see figure 2).

Figure 1. Urbanization Growth in Lagos (1950 – 2035)

Data source: UN World Urbanization Prospects 2018 – Annual Urban Population at Mid-Year (thousands)

Figure 2. Urbanization Growth in Africa (1950 – 2050)

Data source: UN World Urbanization Prospects 2018 – Annual Urban Population at Mid-Year (thousands)

In the context of the recovery from the pandemic this is an issue of national importance for Africa’s governments. UNCDF is hosting a webinar from 9:00 AM to 10:30 EST on 2nd July  to explore how urban investment finance is impacted by the crisis. We will be asking the following questions. Will investment pipelines be put on ice? Will they be accelerated? Will the policy and financial environment make it easier or more difficult to bring sub-national blended finance projects forwards? Will the type of investment change to prioritize projects that not only generate a revenue to repay the finance, but also contribute to rebuilding local fiscal space? Finally, how can the recovery be as green and sustainable as possible?

We will be exploring these questions in the webinar. The webinar will begin with presentations by the Honorable Mr. Osei Assibey Antwi, Mayor of Kumasi, Ghana and Honorable Ms. Yvonne Aki-Sawyerr, Mayor of Freetown, Sierra Leone who will outline the current investment climate in their cities and the state of their capital investment plans.

  • Kumasi, population 2.5 million, is the capital of the Ashanti region, a formerly independent kingdom pre-dates the formation of Ghana by 100 years. The city has a rich cultural heritage that is particularly evident in smaller surrounding towns. Trade, textiles, farming and mining are leading industries in Kumasi. It is among the largest metropolitan areas in Ghana
  • Freetown is Sierra Leone’s capital city and the seat of government. It is the largest city in Sierra Leone and the engine of Sierra Leones economy, creating 30% of the country’s GDP despite housing only 15% of its population, and occupying less than 0.5% of the national land mass. With over one million residents, and a growth rate of 4.2% per annum, Freetown’s population is expected to double by 2028

Then the panel constituted of Mr. Jaffer Machano, Municipal Investment Finance Programme Manager at UNCDF; Mr. Frédéric Audras, Head of Urban Development Division of AFD; Mr. Kevin Nelson, Urban Team Lead, Land and Urban Office at USAID; Mr. Tshepo Ntsimane, Head – Metros, Intermediate Cities and Water Boards at Development Bank of Southern Africa (DBSA); and Ms. Emmannuelle Nasse Bridier, Head of Urban Resilient Infrastructure at Meridiam, will outline their responses to the questions raised above and the presentation by the mayors. Finally Ms. Lisa Da Silva, Global Cities Lead of the International Finance Corporation (IFC) will provide an initial response to the panel discussion.

I look forwards to moderating the webinar and seeing many of you online. For those that cannot make it, we will be offering a live follow up session later that will include an online question and answer session that can dive deeper into the questions raised.

Best wishes and stay safe,

David Jackson,

Director Local Development Finance,

United Nations Capital Development Fund

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